Government Imposing A Price Ceiling

911 WordsOct 11, 20144 Pages
Many governments in developing countries, many of which are attempting to stabilize and mobilize their economies in the hopes and prospects of growing their national economies, set price ceilings on basic food and services in order for them to be more affordable for their citizens and constituents, with the goal of fostering a generation of citizens who are well fed and healthy to take on some work and earn money. While that is a laudable goal, there are numerous unintended consequences that occur with a price ceiling and that may harshen and worsen the country 's economy. The price ceiling is an artificially maximum set price that vendors are legally allowed to charge up to for a good or service as mandated by the government. There are two possible outcomes from a government imposing a price ceiling. The first would be for the government to set the price above the equilibrium price. This does not create any true negative problems on the economy as it still allows the free market and capitalism’s invisible hand to set the equilibrium price and negotiate prices between firms and consumers. This phenomenon is known as a non binding price ceiling. Non binding price ceilings are rarely used by governments imposing price ceilings. Most governments impose their price ceilings below the equilibrium line, which is also known as a binding price ceiling. The issue with a price ceiling below the equilibrium line is that it often creates a persistent shortage of the good or
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